Editorial: A hybrid bankruptcy for Detroit?

Hybrids are all the rage for auto-buyers - to the extent there are any buyers in America's auto showrooms - and it might be the best option for the automakers as well.

Hybrids are all the rage for auto-buyers - to the extent there are any buyers in America's auto showrooms - and it might be the best option for the automakers as well.

Top executives from Detroit's Big Three automakers flew their corporate jets to Washington last week and made a pitch to Congress that went over like the 1958 Edsel. Democratic leaders wisely told them to come back - by commercial flights, please - when they had a plan to ensure any federal bailout would be used to right the listing industry and that taxpayers would ultimately be rewarded for their contribution.

Republicans and some Democrats tired of the management mistakes of the Big Three have no interest in bailing them out under any conditions. They argue that we already have a system for companies that can survive only if they and their debts are reorganized, and it's worked well with the airline and steel industries, among others: Chapter 11. Let the automakers file for bankruptcy, critics say, and let the chips fall where they may.

Those who care where the chips fall, not least the Detroit executives, respond that conditions make that too risky. Reorganization requires access to capital, and the credit markets are still frozen. Consumer confidence is at record lows, they say, and nobody wants to buy a car on warranty from a company in bankruptcy. Chapter 11 could slide into Chapter 7 bankruptcy, which is when factories are locked, employees laid off, and the economy goes into a tailspin.

A government bailout must come with conditions, most seem to agree, but there's great danger in putting politicians in charge of difficult decisions such as closing plants, eliminating models, setting prices and choosing colors for the upholstery.

A compromise may be found in a "hybrid bankruptcy," a phrase borrowed from Paul Ingrassia, former Detroit bureau chief for the Wall Street Journal, who argues that only a bankruptcy court can provide the authority needed to change the union contracts and dealership agreements that bog down company management. Bankruptcy courts are insulated from politics, and have established rules to balance the interests of debtors and shareholders.

The "hybrid" part would come in the form of loans from the federal government to keep the credit squeeze from impeding reorganization. But the loans would be available only through the bankruptcy courts, under broad guidelines, not day-to-day decision-making, set by Congress.

Indications from the incoming Barack Obama administration are that pragmatism will trump ideology, which is exactly what's needed in the current crisis. No industry should be allowed to collapse to prove some ideological point, and the taxpayers shouldn't be expected to throw good money into a failing enterprise.

As Obama said this week, a no-strings bailout would simply kick the can down the road. An unsecured bankruptcy could further drag down a struggling economy. Perhaps it's time to take a hybrid for a test drive.